Since Hurricane Harvey disrupted fuel production by taking out several refineries along the Gulf Coast, gasoline prices have been on the rise, with prices reaching a 2-year high on Aug. 28. Meanwhile, due to the nation’s crude oil reserves, crude futures fell by nearly 3 percent, which is the largest drop the U.S. has seen in almost two months.
The nation’s level of production has been so high that the U.S. is currently brimming with enough crude oil to initially soften Harvey’s blow. In addition, Harvey has hammered American drivers and refineries, which are some of the biggest crude oil customers. Therefore, much of the back-up crude oil the country has reserved sits stagnant because it is unable to be refined: Thus, leading to the crude oil price drop.
How Harvey has Affected Oil Refineries
Massive flooding along the U.S. Gulf Coast has led to the shutdown of several refineries. As of Aug. 29, ten oil refineries that are located along the Gulf Coast were forced to shut down. In addition, ExxonMobil’s (XOM) enormous Baytown facility sustained damage. Furthermore, ports in Corpus Christi and Houston are shut down, which means there is less oil available to refine.
However, since Harvey has effectively crippled Houston, America’s fourth-largest city, the demand for oil products also fell. FGE Energy’s estimations indicate that the flooding could lower the demand for gasoline by around 150,000 bpd.
Refineries that have been able to continue production despite Harvey’s pummeling are unable to operate at full capacity. John Kilduff, who is the founding partner of New York’s AgainCapital, tells Fortune that, “this flooding issue could be a persistent issue with the staff unable to repopulate the facilities…gasoline inventories could decline rapidly if we get an extended shutdown.”
According to CNN, Goldman Sachs estimates that each day, nearly 3 million barrels of oil are unable to be refined into gasoline or any other product. These 3 million barrels total approximately 16 percent of the nation’s refining capacity, which is substantially more than what is being seen in reference to the interruption of oil production.
Oil Production Decreased by Only 700,000 Barrels a Day
According to estimations from FGE Energy, Harvey has interrupted the daily production of oil by approximately 700,000 bpd (400,000 bpd inland and 300,000 bpd in the Gulf). Furthermore, as of yet, there has been no major damage to oil rigs and oil production has started increasing.
At around 9 pm (CDT) on Aug. 29, the Motiva Port Arthur refinery, which is the largest refinery in the U.S., producing more than 600,000 bpd, decreased production by approximately 40 percent. This decrease occurred in preparation for the idling of, or complete shutdown of the refinery.
On Aug. 30, as water from Harvey poured into the Motiva Port Arthur refinery, the company began its scheduled shutdown. Motiva told CNBC that it “cannot provide a timeline for restart at this time.” The company states that it will assess the refinery once the local area flooding recedes.
The Full Implications Have Yet to Be Seen
Currently, the inability to refine petroleum has led to a rise in spot prices for U.S. gasoline futures of 7 percent, peaking at $1.7799 a gallon, which is the highest price we have seen since July of 2015; however, the futures eased, eventually settling at $1.7123.
That said, if, following the cleanup of Texas and Louisiana, the refineries remain crippled and pipelines are found to be damaged, additional increases in the price of natural gas, and a rise in the price of oil, should be expected.
Eventually, the environmental fallout from Harvey could lead to a major lift for renewable sources of energy like solar power, wind and electric cars, essentially unraveling a chemical industry that was expanding rapidly due to the inexpensive natural gas from U.S. shale fields.
Unfortunately, once all is said and done, the U.S. may be forced into importing more gasoline and refined products than previously expected (or desired).
Regards,
Ethan Warrick
Editor
Wealth Authority
